Three challenges Ofcom and rivals over imbalanced UK spectrum distribution

Three is still fighting Ofcom after the failed merger deal with O2, to win a greater share of the UK’s mobile spectrum. We caught up with CEO Dave Dyson and CFO Richard Woodward to find out how Three is battling the regulations body and how rivals have ‘strategically bid’ on spectrum just to keep it out of Three’s hands.

What could have been

Three’s attempted merger with O2 was fundamentally about scale, as CEO Dave Dyson explained. The more customers you have in your pocket, the more efficient your business becomes and the more competitive you can be.

The merger was also about network capability. There’s a rather obvious demand for faster speeds from consumers and data consumption is only going to speed up as people stream high-resolution video and music through their handsets. While Three’s average customer used just 0.4GB per month back in 2007, now the average consumer burns through 5.4GB per month.

Three and O2’s networks combined could have delivered a greater capacity as well as faster speeds, Dyson explained. In fact, Three claims it could have quadrupled the capacity and speeds on offer to customers if the merger had gone ahead.

A great imbalance

But because the deal was thwarted by Ofcom, the UK still has the most imbalanced network spectrum of any developed country, according to Three’s analysis of the Gini Index. In other words, EE/BT and Vodafone have a massive slice of the UK network pie, leaving not much for Three and O2. A Three/O2 merger would have brought more balance, which in turn may have been deeply beneficial for customers.

So, how can we restore the balance? Well, Three is asking Ofcom to impose a cap of 30 percent when it comes to spectrum ownership, which means that if BT/EE and Vodafone bid for more spectrum in the next UK auction, they might have to sell some of their existing spectrum to make up for it.

Interestingly, Three claims that BT/EE and Vodafone have strategically bid on spectrum in the past, despite not needing it. In other words, those networks are sat on spectrum that they’re not even using, purely to keep it out of Three and O2’s hands. That would be bad news for consumers, and Three is hoping to gain control of this spectrum and put it to good use.

A Vodafone UK spokesperson responded by saying: “These are some pretty surprising comments from an operator which has been in the UK market for more than 15 years and has had ample opportunity as well as the financial resources to bid for spectrum when it’s become available.”

EE also had something to say on the matter: “We have never stopped using our spectrum to deliver the very best network experience for customers. We pioneered 4G and we are a leader in network speeds. Today’s announcement of new Cat 9 technology keeps the UK a step ahead, providing even more capacity and some of the highest mobile download speeds in the world.

“We are unique in our commitment to expand 4G coverage to 95% of the UK’s landmass by 2020, further than any other UK network has done, and will continue to ensure the UK stays at mobile technology’s leading edge.”

Looking to the future

Besides battling Ofcom, Three’s focus is now on what it can actually control, and doing the best that it can with the infrastructure already in place. Dyson admitted that if another potential deal came along then Three might well consider it, but for now the network is focused on organic growth, by offering the best possible deals to customers and trying to expand its spectrum share by challenging Ofcom’s regulations.

If you look at the stats, things seem to be going well for Three. The network’s margin is up compared with the second half of 2015 and profits are rising steadily, according to Three’s CFO Richard Woodward. And while the number of contract customers under Three’s belt has pretty much flatlined, the company’s user base is still rising thanks to an increase in pre-paid consumers joining up.

Perhaps that’s a reflection on how handset quality is massively improving, meaning people no longer feel the need to upgrade every two years. Or perhaps it’s a trust issue. After all, only 15 percent of customers actually trust networks to charge fair and transparent prices, meaning that our high street banks are treated with less suspicion.

Feel at home is still proving popular, saving customers £3.9 billion in total since its birth. The average user burns through roughly 1GB of data per trip and 80 percent of customer trips are covered by Feel At Home.

Three’s Net Promoter score has also massively improved, meaning customer satisfaction is way up. This figure was a rather embarassing -3 back in Q2 2012, but now it’s a very healthy 19, compared with the UK network average of 6.

It’ll be interesting to see Ofcom’s response to Three’s challenges, and we’ll report back when we hear more.

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